IMF sees Mozambique’s latest gas-project law setting global benchmark

By TOM BOWKER
Bloomberg

A law adopted by Mozambique this week to provide long-term fiscal and legal stability for gas projects off its northern coast will be a benchmark for such agreements in other countries, said the International Monetary Fund.

The law applies to two projects in the Rovuma Basin, near the border with Tanzania, operated by Anadarko Petroleum and Eni. It sets terms covering 30 years, while allowing for the tax the companies pay on gas production to be increased after 10 years and 20 years.

Should Anadarko, Eni or the government disagree on whether any terms have been violated, an independent expert appointed by the International Chamber of Commerce will adjudicate the dispute before any compensation is paid. This provision will “probably establish a new benchmark,” said Alex Segura-Ubiergo, the IMF’s resident Mozambique representative.

Eni, based in Rome, and The Woodlands, Texas-based Anadarko are considering whether to develop offshore fields that are estimated by Mozambique’s national oil company to hold 250 trillion cubic feet of gas. That’s enough to meet world consumption for more than two years. The country may become the world’s largest exporter of liquefied natural gas after Qatar and Australia.

Mozambique’s Rovuma law allows Eni and Anadarko to set up special-purpose companies abroad for financing purposes and to have revenue paid into overseas bank accounts monitored by the Bank of Mozambique. That’s “in line with best international practice,” Segura-Ubiergo said.

Bank Training

The government was able to modify an earlier version of the law that allowed the gas companies to take compensation directly from the offshore account, Segura-Ubiergo said. In countries such as Papua New Guinea, “the concessionaire has access to compensation often too quickly, so there’s not a lot the government can do to protect its interests,” he said.

The central bank will need training to fulfill its role of monitoring the international accounts, Segura-Ubiergo said. Mozambique’s national treasury will also have to cooperate with the central bank on how revenue from the gas of as much as $5 billion/year is spent, he said.

“It is not only tax revenue, but also indirect economic impacts that can benefit the country,” said Requier Wait, an economist at North-West University in Potchefstroom, South Africa. “Fiscal and legal stability is a big concern for investors and can contribute to attracting further upstream investment. Given the current low-price environment, the fiscal and legal stability provided by the decree could be a win-win for companies and the country.”

Law’s Weaknesses

The new law is a “significant positive step” for its project, Anadarko said in a statement. The company said it appreciates “the government’s diligence and cooperation in getting us to this point.”

Other observers have been less impressed with the legislation. It’s a weakness that the royalty is based on the gross value of production rather than the net value, said Diderik Lund, an economics professor at the University of Oslo.

“If LNG prices increase to, for example, twice the average cost of extracting the gas, the royalty could have been almost as high as 50% before the companies would lose their interest,” he said.

The law adopted this week is “some distance from the ideal result seen from a government perspective,” said Mette Masst, Norway’s ambassador to Mozambique. The agreement reached “reflects what it was possible for the government of Mozambique to negotiate with the concessionaires,” she said.

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